Your company has been exploring a property located north of the equator and within the band of latitude of the tropics. Initially, a surface oxide orebody with fine grained gold mineralization was discovered. To date a mineral resource sufficient to support 2 years of production has been confirmed. Management had directed exploration staff to plan for drilling of other parts of the property, with an objective to double or triple the resource before preparing a feasibility study (FS).

Recently and unexpectedly, deeper diamond drill holes have revealed that below the oxide zone there is copper-enriched sulphide mineralization with by-product gold and silver. You are in a meeting to discuss the timing and sequence of next steps. A colleague presents the attached following diagram.

Your colleague: "The discovery of sulphide mineralization doesn't change management's preference to increase gold resources before assessing the feasibility of mining and treating the oxide ore in a dedicated circuit. However, we will want to do further drilling to develop a sulphide resource estimate, and I think we could advance feasibility work on an integrated mill, designed to treat sulphides but with provision to add an oxide circuit, at the same time. Exploration for additional gold oxide ore could continue, at a slower pace as resources would be concentrated on sulphide drilling and the integrated FS. We could confirm the inclusion of a gold circuit in an integrated mill later, or if the 'integrated' FS result was negative and oxide resource was increased sufficiently, we could do an 'additional gold' FS at that time".

Your boss: "Actually, the potential for a viable longer term project producing copper and by-product gold and silver from sulphides would result in management support for a FS based on the current gold oxide resource, as a possible first phase of an integrated project. The integrated project could be designed to accommodate adding capacity in a circuit treating the oxide ore if more was found. However, I think we should assume that exploration for additional gold will now be deferred while we focus on drilling out the sulphides and then assessing the feasibility of an integrated mill based on the sulphide resource. If the 'existing gold' FS result was negative, we could do a 'sulphide only' FS".

Your boss continues: "I am concerned with sulphide drilling and FS activities occurring in parallel, and would like you to split them into separate steps. I would also like to see if we could achieve earlier (or at least no later) cash flow in positive outcome situations, and increase management flexibility. Let's see if some real options thinking could help us".

Before the meeting ends, you agree on the following assumptions for timeframes (in addition to those in your colleague's diagram): 'existing gold' FS - 0.5 year; 'existing gold' development - 1.0 year; 'integrated development 1.0 (shorter than your colleague's diagram because it would follow and benefit from 'existing gold' development); sulphide FS - 1.0 year; 'sulphide' development - 1.5 year (longer than 'integrated development' in this scenario because no gold development would have occurred).

A. Sketch an alternative diagram, based on the information provided, that would respond to the objectives your boss has mentioned. For each decision point (blue squares) in your diagram enter a description and the point in time at which it occurs

B. Comparing the two diagrams, identify two points which provide evidence that the objective of your boss related to timing of cash flow is met by the alternative diagram, and for each indicate the amount of improvement vs your colleague's initial diagram

C.Name and describe a type of option that could be added to the two branches in your colleague's diagram and the one branch in the alternative diagram that end in a double line, and indicate roughly what size of $ might be assigned to it

D. Referring to the diagram in part A, consider a scenario in which the Integrated FS result is positive (+) and by that point (year 1.5) the gold resource has been increased. Name a type of option that would fit this situation and explain your choice

Integrated development (1.5) + Sulphide drilling + integrated FS (1.5) Integrated FS Additional gold Gold exploration development (1.0) + S Add. gold FS (0.5) Additional Y gold FS More gold? N - - - - - - - 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5